You may want to consider getting an Federal Housing Authority (FHA) backed loan to finance your home. FHA loans are insured (up to certain limits) with the government. This makes the loans attractive to lenders who handle them.
And as you’ll see, FHA loans can mean a significant upside to the borrowers.
Consider this loan source if one or more of the following apply to you:
- You have a limited amount for a down payment (currently you can put as little as 3.5% down)
- You’re a first time home buyer
- You want to keep your monthly payments low
- You don’t have perfect credit
- You’re worried about qualifying for a loan
If any of these describes your current situation, then an FHA loan may be the best choice for a home loan.
FHA Loan Benefits
An FHA loan offers the following five benefits to borrowers:
- Easier Qualification- Because these loans are insured by the government, the lender may be more willing to work with you on finding the loan type that works best for you
- Lower Rates- Again, rates may be more advantageous than other loans because the government insures the funds
- Poor Credit- Poor credit may not be a barrier to obtaining an FHA home loan. In fact, you may even qualify if you’ve had a bankruptcy.
- Stability- The FHA has been in existence since 1934. It will continue to be here to protect you.
- Protection- If you encounter tough financial times after buying your home, the FHA can provide a host of options to help keep you in your home.
The FHA insures home loans for lenders against defaults. However, they do not set interest rates.
They are some requirement both on you and the property you’re considering that you’ll want to be aware of.
FHA Borrower Requirements
To see of you qualify for an FHA loan the following guidelines apply:
- Any bankruptcy must be 2 years old and the applicant must have demonstrated good credit for 2 consecutive years after the bankruptcy was filed
- A foreclosure has to be at least 3 years old
- 3 consecutive years of good credit must follow
- You need 3 years of stable income and
- You must be able to prove you paid all your bills
- You must be able to put down 3% toward the purchase price of the home
- You must be able to cover about 2.25% in closing costs
- Your monthly payments must be in the neighborhood of 30% of your income
- You have to pay any title search and title insurance for the home
Also, FHA loans are assumable from a seller and to pass on to a buyer.
FHA Home Requirements
In addition to borrower requirements, requirements exist for the home you’re considering buying. These include:
- Single family home
- 2 to 4 unit properties
- Double wide manufactured and modular homes
- The property must be used as a primary place of residence
Ineligible structures include co-ops, boarding houses, commercial properties, hotels and private clubs.
If you’ve acquired the home within the last 90 days, it’s ineligible for an FHA loan.
Another FHA loan called the 203 (k) loan is used for buying and remodeling a home. The remodeling costs must be less than $5000 and the home must be at least one year old.
FHA offers the following four loans. But check with your lender or at the FHA site below to see which loans are available in your area.
Fixed Rate Loans- Most FHA loans are fixed rate mortgages. With a fixed rate loan, your interest rate stays the same for the life of the loan. This means you know how much your monthly payment will be and can budget for it.
Adjustable Rate Loans- With an FHA adjustable rate mortgage (ARM), the initial rate and resulting payments are low. However, the rate may change over the life of the loan.
The changes are capped at 1 to 2 percentage points per year and usually 5 or 6 percentage points from the beginning rate over the life of the loan.
Because the initial rate and payments are low, you may be able to afford more house.
Purchase-Rehabilitation Loans- When you found a home you like that needs a lot of work you may want to consider an FHA purchase-rehab. This loan uses the projected amount (subject to limits) of the property after the work is completed. It includes the mortgage and the price of repairs.
The advantage of this loan is that you have one mortgage but can complete the home repairs after you’ve bought the home.
Indian Reservations and Other Restricted Lands- This is like a conventional FHA loan except that you can finance your closing costs or use a gift for a down payment. You can also get 97% financing.
More information on FHA Loans
Excellent sources of government information on FHA loans are:
The Department of Urban Housing Development: http://www.hud.com
The Federal Housing Authority Page: http://portal.hud.gov/portal/page?_pageid=73,1&_dad=portal&_schema=PORTAL